Internationalization and Digitalization: Knowledge and Monitoring of Foreign Markets
Thanks to Open Data, gaining in-depth knowledge of foreign markets is becoming increasingly easier.
Published by Luigi Bidoia. .Internationalisation SME Export markets Digital Export
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A previous article (Internationalization and Digitalization) introduced the issue of how new information and communication technologies can make internationalization more accessible for small and medium-sized enterprises. In this article, we will explore one of the areas in which digital technologies can help the most: knowledge and monitoring of foreign markets.
Corporate activities can be basically divided into two systems: the first concerns the supply system, i.e. what the company is able to offer on the market; the second concerns the way in which the company relates to the market (which we can refer to as "marketing system").
Internationalization is a strategic choice that shifts the relative importance between the two systems, reducing the importance of the first one, while increasing the weight of the second one.
On a local market, a company can thrive relying above all - if not exclusively - on its supply system; this is much more difficult for a company that wants to operate in distant markets. A marketing system may not be strictly necessary on a local market, since proximity allows the company to know the needs/desires/preferences of its potential customers in a natural way, almost by "osmosis" with its territory. In the same way, in a local market, a company can be able to communicate the characteristics of its supply system, enhancing its strengths, through direct communication. This becomes much more complex if the market you want to serve is far away.
The elements that make the marketing system towards a local market fundamentally different from the marketing system towards a distant market are different in nature. First of all, compared to a single local market, there are many distant markets. This trivially implies the choice of which market(s) to serve. Secondly, knowledge of a distant market can only take place through channels other than osmosis.
Approaching a new foreign market is a process that can significantly engage a company. Sometimes the awareness of these difficulties translates into a sort of "fatalism", that leads to consider different markets as equals, since, by definition, there is no easy foreign market.
In this case, companies tend to follow the opportunities that external events bring to their attention. For example, a company might choose a foreign market because its trade association has organized a mission to that market or because they met potential customers from that country at an international exhibition. This approach has two important limits:
- For a given company, different markets may present significantly different opportunities and risks.
- Tactical decisions may hide the inability of a company to make shared choices. Unshared choices have a high probability of failure, not just because the choice is not optimal, but because they will hardly find adequate support in the structure of the company.
The choice of target markets should be based
on an analysis of opportunities and risks
of various potential markets
ExportPlanning Market Selection tool has been developed to allow for the comparative measurement of the opportunities and risks of a market, in order to identify the most promising target markets.
To highlight its potential for selecting different markets, it may be useful to briefly report the case of a company producing "Cereal Dryers", which recently developed a project to select foreign markets.
It is clear that the most direct indicator of the potential of different markets is given by the Demand for Cereal Dryers. This can be approximated by Apparent Consumption. Another indicator of the market potential of Dryers can be obtained from the Production of Cereals in a country. It is clear that, all other things being equal, the greater the production of cereals, the greater the potential for sales on that market of Cereal Dryers.
In the following graph, different countries are positioned on the map on the basis of the Demand for Cereal Dryers in 2018 and Cereal Production in 2017 (latest available year).
The graph shows a strong relationship between the two variables and allows to clearly identify two clusters of markets: markets with a high production of cereals and a high demand for cereal dryers; markets with a relatively low production of cereals and demand for cereal dryers.
The first cluster includes two developed countries (USA and Canada), four developing countries (China, Russia, Indonesia and India) and a country considered as Frontier. This distinction is important because different degrees of development of a market involve different approaches, that may require skills that could not be available in a small or medium company.
In the graph, the circle associated with the single countries is proportional to the growth in imports expected over the next three years. In this way, it is possible to have a clue of which countries are likely to turn abroad to meet increases in domestic demand.
The map allows an objective and synthetic evaluation of the opportunities offered by different markets. This information can be integrated with other information (different degree of openness of markets to foreign trade, GDP growth rate, political risk, etc..) and initiate an internal decision-making process within the company. The result of this process will be an "optimal" target market, identified through a shared choice.
Knowledge of a distant market
Knowledge of a distant market cannot be acquired by "osmosis", as in of local markets, but must find different channels. Among these, the two most traditional channels are:
- The development of a professional relationship with a consultant, who has specific knowledge of the target market
- The initiation of a direct relationship with potential customers belonging to the target market, through trade fairs or business missions
We can indicate the first channel as Acquisition of tacit knowledge and the second one as Direct Experience. Both of them are generally very expensive, especially in terms of sunk costs. Most of the tacit knowledge acquired can, in fact, disappear if the relationship with the consultant bearing this knowledge is interrupted. Similarly, the experience gained with potential customers during a trade fair can be useless if the information collected does not become, through its systematization, business knowledge, and the relationship with potential customers is not made continuous.
An alternative channel, made possible by new digital technologies, is the Development of an explicit corporate knowledge on the foreign markets of interest. This can be done by following the same path that traditional business intelligence instruments allow with internal data, having, however, as a starting point, data external to the company.
The development of Open Data is making objective information on foreign markets more and more accessible, at low cost. A precious source of information on foreign markets are customs declarations. Every month, all the companies in the world declare to their statistical institutes the value of goods and services sold abroad and purchased from abroad.
Statistical institutes safeguard the privacy of declarants and make data available to potential users almost always in open mode and with a high degree of detail.
By collecting this data and integrating it with other macroeconomic or business information, it is possible to develop a good knowledge of the different markets. In addition to its low costs, the advantage of this approach is that it increases company knowledge and allows for a continuous process of growth of the company's explicit knowledge of foreign markets.
 Apparent Consumption is calculated as the sum of Imports and Production sold on the domestic market.
 Countries considered as Frontiers are those that, although they have recorded significant stages of development, do not yet have an economic structure and a size that allows them a significant autonomous development.
 Data secrecy consists in aggregating elementary data, making it impossible to go back from the published data to the data of a specific enterprise.